Borrowing from Commercial Banks

Commercial banks

Commercial banks in India grant loans for a period of 3 to 5 years. Normally they give term loans for one or two years. The period is extended at intervals and in some cases loan is given directly for 3 to 5 years.

Merits of Commercial banks

1. Flexible Source:

It is a flexible source of finance as loan amount can be increased as per the business needs and can be returned in when funds are not needed.

2. Secrecy:

Banks keep the financial operations of their clients secret.

3. Economical:

Time and cost involved are lower as compared to issue of shares, debentures etc.

4. No interference:

Banks do not interfere in the internal affairs of the borrowing concern.

5. Low interest:

In case of small-scale industries and industries in villages and backward areas, the interest charged is very low.

Limitations of Commercial banks

1. Charge on assets:

Banks require personal guarantee or pledge of assets while granting loans. So the business cannot raise further loans thus it reduces the borrowing capacity of the business.

2. Time consuming and inconvenient:

Too many formalities for getting term loans from banks make the borrowings from banks time consuming and inconvenient.